Bad Boards

L ast month I covered HOA Boards, The Good, The Bad, and The Ugly - Part I. In that newsletter, which is posted in these archives.

I covered board members that are bullies and those that divulge confidential information and what to do about them, and boards that engage in disparate treatment of owners. When I reached four pages, I figured that was probably enough for you to digest at that time, and I promised in this edition of WHAT'S NEW IN HOA LAND to cover additional topics including board members engaging in conflicts of interest and refusing to sign or adhere to codes of ethics. So here goes...

Conflict of Interest - this subject leads to much confusion. Owners tend to assume a conflict of interest exist even when it doesn't. Before the Davis Stirling Act was reorganized in 2014, it referred to the Corporations Code to determine whether a conflict of interest was occurring. The Corporations Code left a lot of room for board members to do all kinds of things as long as they "disclosed it". This meant they could provide services to the Association or even recommend their own companies for contract work, which of course resulted in financial gain. All they had to do was simply by point it out at an open board meeting that they owned the company or had a financial interest in it, or that a family member had a financial interest in the contract work and that was it. A lot of directors ignored this simple disclosure requirement, but even if they did comply by mentioning their interests at a board meeting, the owners never became aware that someone on the board was benefiting from a contract when it was approved by the board. Why is that? Because owners don't tend to go to meetings or even ask for or review minutes of the meetings, so unless the board sent out a notice to all owners, there was really not full disclosure in the moral sense. As often happens, there was technically legal compliant disclosure so no one got in trouble with the law. It was not a conflict of interest if it was disclosed, even when "minimally" disclosed.

Additionally, the "question" often arose, or should I say "complaint", that the board members were getting special treatment such as work done specifically on or in their units by Association contractors, or that they were first in line for any painting, construction, fence, deck or balcony work when there was an association wide project to be undertaken. I have heard from owners that directors get special favors when they want to add something or make an architectural change. The legislators in California have attempted to minimize the concept that directors get special treatment by prohibiting individuals from voting on matters in which they are directly involved. So now, in addition to disclosure, board members are prevented from voting on motions for the board for pretty much any association action that would benefit them directly. Violation of this law would rise to a lawsuit. Here is the law as it appears in the Davis Stirling Act:

    "ARTICLE 8. Conflict of Interest [5350- 5350.] Civil Code Section 5350.CONTRACTS INVOLVING DIRECTORS/DIRECTOR CONFLICTS OF INTEREST, INTERESTED DIRECTOR
  • (a) Notwithstanding any other law, and regardless of whether an association is incorporated or unincorporated, the provisions of Sections 7233 and 7234 of the Corporations Code shall apply to any contract or other transaction authorized, approved, or ratified by the board or a committee of the board.
  • (b) A director or member of a committee shall not vote on any of the following matters:
  • (1) Discipline of the director or committee member.
  • (2) An assessment against the director or committee member for damage to the common area or facilities.
  • (3) A request, by the director or committee member, for a payment plan for overdue assessments.
  • (4) A decision whether to foreclose on a lien on the separate interest of the director or committee member.
  • (5) Review of a proposed physical change to the separate interest of the director or committee member.
  • (6) A grant of exclusive use common area to the director or committee member.
  • (c) Nothing in this section limits any other provision of law or the governing documents that govern a decision in which a director may have an interest."

The references to the Corporations Code in the law still relate to disclosure. This law does not prevent a director or committee member from stating are arguing their position on any such matter before the board, but it does prevent them from voting on something that could be voted in their favor. A quandary arises, of course, if a majority of the board members have similar things going on and none of them could vote on the matter as it related to themselves, but still could vote on the matter as it relates to their fellow board members. Likewise, if you have a board where the directors tend to vote in a "block" or the majority of board members tend to be friends, it is still possible, and even probable, that the director will get a favorable judgment or outcome even if they can't vote themselves. However, if the other directors choose an option that benefits the director who is directly involved, and it creates a situation where that director got a favorable outcome but other owners do not get such a favorable outcome in the same situation, then we are talking about the possibility that the other directors have breached their fiduciary duty by voting in favor of their "friend". That is because the board members still cannot engage in inconsistent treatment where they get benefits the membership does not get. As I believe I mentioned in the prior E newsletter, this differential treatment is one of the main causes of lawsuits against associations and the boards of directors, and one of the main causes of directors and officers insurance claims.

Codes of Ethics: this is another subject. I have read a number of different proposed codes of ethics and have posted a sample on my own website. I get questions from readers who asked me why I don't have something from somebody else's code of ethics in my code of ethics and my answer is that different people approach codes of ethics according to their own experiences and make sure they cover things that they have seen need to be covered in their own situations. In my situation as an attorney, I have seen all kinds of things happen that I could propose be put in a code of ethics, but I prefer to stick to a code of ethics that sets forth specific actions that are required by law instead of individual actions that I have seen cause problems in an Association. I could find pros and cons in every code of ethics that you might point me to but for purposes of this newsletter, I will only address a few just to illustrate why it is important to try and pay attention to the most perspectives possible when drafting a code of ethics.

ECHO (Educational Community for Homeowners- www.echo-ca.org): ECHO recently published a Sample Code of Ethics. I think it's a very good even though it is more esoteric than what I would suggest. I like the fact that it is a statement of commitment as opposed to a code of ethics that could be construed to punish a board member. I'll explain what I mean by that in more detail below. But I like the opening paragraph which says:

It says: "As a board member, you need to be aware that more is expected of those in leadership roles. Review the following statements. Signing this Code of Ethics solidifies your commitment to honest board service."

I have a little trouble with the first "commitment" though because it says "As a member of this Board, I will... "*Focus on governance for and not management of the Association." So I ask myself what small association board of directors will be able to sign this commitment when the Association is "self - managed" by the board?

I'm not making a statement here pro or con against the concept of self-management, but I am saying that a small association board that manages the HOA when the Association cannot afford to hire professional management could not commit to this. There is an easy solution, of course, that is to leave out the first commitment.

There are also some "do nothings" and "nevers" (absolutes) in this code of commitment that are bothersome to me because a director might accidentally engage in some conduct violated these statements. it would especially be bothersome if the rest of the board turns around and uses this code against an individual director, which sometimes happens in a situation where there is a minority director who does not tend to agree with the rest of the board members on salient points.

So I might use the words "do my best to" or "endeavor to" if I were using these phrases instead of the absolutes. But that's just me looking for a way to identify appropriate or inappropriate conduct without specifically condemning someone who might be misled by management or make an innocent mistake. Again, there's nothing wrong with these words - I'm just pointing out a different way to think about things in producing a code of commitment or conduct.

I also have a little problem with the last point which commits a director to: "Consider myself a Trustee of this organization and do my best to ensure that it is well maintained, financially secure, growing, and always operating within the best interests of those we serve; the members."

Why would I care? First of all, I am not keen on the use of the word "trustee". It's not a word used in this context in the Davis Stirling Act and I don't think it appears in the Corporations Code in this context either. The word "fiduciary" tends to show up more often in the HOA context, but even that is not a term people commonly understand. Here is what I have used in my own "Code of Commitment" as an alternative to using terms like Trustee or Fiduciary: "To act responsibly as to all financial matters and decisions and to do my best to ensure that the Association, the properties and the finances are well managed and fiscally well protected."

Committing to financial security is a bit scary because "security " is an undefined term and as for "growing", I'm not sure what that means exactly. I will stop picking on ECHO now and tell you that I think their production of a Code Of Commitment is banner.

And for more on the subject, here are some points I have included in a Code Of Commitment I circulated years ago and wrote about in newsletters. I was more in favor of a Code of Commitment rather than a Code of Ethics from the start. (See why below.) Here are some of the commitments I recommend:

  • To engage in lawful acts to the best of my ability (understanding the HOA laws are complicated).
  • To maintain a high standard of conduct that is above reproach and to avoid any appearance of impropriety.
  • To accept the BOD's decisions made by majority. I understand there may not be unanimous support for every action taken.
  • To demonstrate mutual respect for fellow Board Members and Members of the Association at all times.
  • To attend and participate in all meetings and communications to the best of my ability.
  • To maintain confidentiality with respect to all executive session and privileged communications (including attorney-client privileged items).
  • To refrain from voting on any matters before the Board that involve me or my family directly.
  • To allow the Chair and fellow board members a reasonable opportunity to speak on matters at meetings without interruption, threats or harassment, and to respect parliamentary procedure.

I have also seen a very good Ethics Policy which is well detailed and covers a lot of the legal requirements for board members on the website of the law firm Adams & Aucoin called Davis-Stirling.com. There is a lot of good information on this website and between their website and mine, directors and homeowners throughout the state can educate themselves quite well on things they need to know about living in, and problem solving in, and administration of an HOA. However, it is important to understand that the Davis-Stirling website is not produced by the State of California even though the name suggests that to the general public by using the same name as the Act itself. We are all just a bunch of HOA lawyers giving you our take on things. ECHO does the same thing. None of it should be considered legal advice because we did not write these things for your specific association and you (small associations listen up) may need something slightly different than what the larger HOAs who can afford management need.

One last thing I will say about codes of conduct before closing this particular newsletter is that if a board intends to enforce a code of conduct to unseat a board member the qualification for adhering to the code of conduct or code of ethics must be stated in the bylaws or CC&Rs. A board cannot vacate a directors' position for failure to qualify to serve unless the qualification is listed in one of these Association governing documents. Adopting a code as a "Rule" will not suffice, in my opinion.

And, I also believe that the board of directors cannot require any director, in order to qualify to serve, to sign a code of ethics or code of conduct unless, again, signing such a document is a qualification to serve appearing in the Association bylaws or CC&Rs. there may be attorneys or even non-attorneys for that matter that don't agree with this. I don't know of a case where this particular subject has been dealt with in a manner that would provide any binding opinion saying that a board could adopt a requirement for directors to sign a code of conduct or code of ethics, or enforce it to try and unseat a director.

There has been a case where a board was allowed to add qualifications which would prevent two persons from the same household from serving on the board which the court found to be a logical restriction but I do not think that is similar enough to allow a board license to run with and enforce with the heavy hand any code of ethics or code of conduct. For what it's worth, this is where I stand on the matter. When I am drafting amended documents for associations some boards ask about putting in a requirement to sign and adhere to a code of conduct or code of ethics and I am willing to assist with this if the board finds it important. However, if this is the case, I feel that there should at the very least be clarity on what subjects may be covered in such a document because I have seen boards run wild against minority board members are persons they would not want to see on the board. In other words, I have seen situations where I believe it could be misused as a power-play and I'm not in favor of that.

In the next newsletter, I will touch on recall, sanctions, public flogging, censure, and court-appointed directors, provisional directors, and receivers. These subjects come into play when the membership or a board is disgusted with the conduct of a particular director or the entire board, or if board members want to resign or not run again and can't find anyone to volunteer for the positions. Any of these situations is difficult and I am pretty certain as a follow-up these last two e-news letters that information in these areas would be welcome.

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Can you believe I passed to 100 mark on E-newsletters last fall when I was laid up with foot surgery. That's a lot of information, all of which is available to you here.

And at the same time I finished the Guide called:

THE SMALL HOA SURVIVAL GUIDE which is now available in the webstore under BOOKS and GUIDES at http://store.californiacondoguru.com/index.php/guide-booklets.html"

It is a new publication geared specifically to help small HOA boards but is filled with basic information on running an HOA and what is important. Many publications as well as the 2016 Davis-Stirling Act in Plain English which explains all of the laws discussed above are available in the Guru Webstore.

Just navigate to the store directly, or check out the Articles, E-news archives and blogs first to see if you can find what you need. When ready, go to the store and see that there are tabs for the Books, Primers, Forms and Guides.

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WEBINAR SCHEDULE: I had planned to begin WEBINARS this year but frankly, there just is not time for all things. So ... we will see what the future brings, but for now, I will just keep writing. Be sure and visit the blogs, and also send me short questions through the website so I have something to answer for you!!

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I have a private law practice in Pleasant Hill, but serve homeowners association and homeowners throughout the State of California. My practice is in large part now web based and telephone consultations are available. I have clients all over the state and am a real "road warrior".

The information provided here is for advertising and informational use only and does not constitute legal advice or create an attorney-client relationship. Everyone should consult with legal counsel in all cases where legal representation or advice is desired.

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